NEW YORK (Dow Jones News) -- The recent move toward higher initial offering prices for new Internet stocks is viewed by some as a sign that online companies have finally seen the light.
Others believe the debt-ridden, start-ups may be looking at the end of the line.After months of conjecture over how to fairly value new Internet stocks, the underwriting industry seems to have decided to err on the side of largess.
"It's the Wall Street way. We're all greedy as hell," said Edmund Cashman, head of the syndicate desk at Legg Mason Wood Walker Inc.
Four of the last five Internet offerings have priced above the $20 range, crossing a seemingly impenetrable threshold in place despite unprecented demand for the issues.
OneMain.com Inc., for example, a Southhampton, N.Y., Internet services provider, capitalized on the new trend by raising $187 million this week through the sale of 8.5 million shares at $22 each. It was one of the largest Internet IPOs to date in terms of proceeds, dwarfing those of online behemoths Amazon.com Inc. and eBay Inc., which raised $54 million and $63 million, respectively.
Other recent new issues that have crossed the $20-a-share plateau came from Autobytel.com Inc., MiningCo.com Inc. and iVillage Inc. And San Francisco-based Critical Path Inc., which provides electronic mail services, is expected to follow suit next week, having increased its estimated price range on Friday to $18 to $20 from $9 to $11.
The size of the offerings are increasing, as well. Two companies expected to price IPOs next week -- ZDNet Group, and Priceline.com Inc. -- of issuing 10 million shares.
The latest trend made this week the most profitable ever for new Internet companies. Six online deals raised nearly $500 million, according to Securities Data/Thomson Financial. The second most profitable week was in April 1996, when H&R Block Inc. spun-off its CompuServe Corp. unit in an IPO that raised about $400 million.
The only question surrounding the recent run-up in offering prices is why did Wall Street wait so long. Industry watchers have been second-guessing the pricing process for Internet stocks since November, when theglobe.com Inc. priced 3.1 million shares at $9 each and promptly opened at $90. A pattern that lasted for months had been established.
"The fact that they're moving the prices up makes sense given the state of supply versus demand," said Jeff Matthews, a portfolio manager with Ram Partners, a Greenwich, Conn., investment firm. "It seemed kind of silly to price something at $12 only to see the first trade come in at 60."
The impetus appears to be coming from the companies issuing the new stock. Several, including theglobe.com and Marketwatch.com Inc., enjoyed the publicity surrounding their stocks' phenomenal run-up. But the fact remained that more money could have been raised had the stocks been priced higher to meet the level of demand.
"It's the underwriters succumbing to the pressure from the issuers to raise more money. The issuers are tired of leaving money on the table when they know the markets will support higher pricings," said David Menlow, president of the IPO Financial Network, based in Milburn, N.J.
In defense of the underwriters, the Internet phenomenon is unlike any other prior sector frenzy, according to many longtime industry watchers. "Everybody's flying a little blind," said Legg Mason's Cashman, a 30-year syndicate desk veteran.
Underwriters have traditionally priced new stocks based on criteria that includes comparable financial statistics -- namely earnings -- culled from companies in the same sector. In the case of Internet companies, however, very few have earned money in their short operating histories. "People in our business are used to pricing deals based on comparable P/E ratios," said Cashman. "But with these companies you don't have any 'Es' to work with."
Instead, bankers have attempted to use pricing criteria that include comparing the number of hits -- or user visits -- to a specific Web site. But this early in the Internet-age, that system has proved a very imprecise science. Now, underwriters are apparently pricing deals based on little more comparable information than how much money another Internet concern raised a few days earlier. "This is a comparable game. Everything is valued comparable to something," said Dick Smith, senior managing director of equity capital markets at NationsBanc Montgomery Securities Inc.
The predominant school of thought concerning the latest Internet IPO dynamic is that the companies taking their shares public should raise as much as they can while the euphoria lasts. And no one expects it to last forever. Indeed, Menlow said the high prices could be an early sign of "the unraveling of the Internet market," as investor demand inevitably subsides in the wake of the increasingly higher valuations.
Next week's calendar includes:
Pepsi Bottling Group Inc., Somers, N.Y., is issuing 100 million shares at a range of $23 to $26 in a spin-off from Pepsico Inc. Merrill Lynch & Co. and Morgan Stanley Dean Witter are joint lead underwriters.
ZDNet Group, the online operation of New York technology publisher Ziff-Davis Inc., expects to sell 10 million shares at $11 to $13. Goldman Sachs & Co. and Donaldson Lufkin & Jenrette are co-lead managers.
Priceline.com Inc., a Stamford, Conn., electronic-commerce company, is issuing 10 million shares via Morgan Stanley Dean Witter. Price Talk is $12 to $14.